Green bond lays platform for future success, says AOFM chief

James Thornhill
08:00am July 23 2024

AOFM CEO Anna Hughes (left) and Westpac Institutional Bank CEO Nell Hutton. (Supplied)

The success of the Australian government’s first green bond lays a solid foundation to expand the program and support the country’s transition towards a net-zero economy, says Anna Hughes, CEO of the Australian Office of Financial Management.

AOFM, which issues debt on behalf of the federal government, raised $7 billion with its debut green bond in June. The deal was more than three times oversubscribed and attracted strong interest from overseas, with 35 per cent being allocated to international investors. 

“What we’re hoping is that with a AAA-rated sovereign issuing a green bond it will mean we have even more international investors participating in green bonds in Australia,“ Hughes said in conversation with Nell Hutton, head of Westpac’s Institutional Bank. 

The European Investment Bank was the first green bond issuer back in 2007, starting a new asset class in which the money raised is allocated exclusively to financing projects which have a positive environmental impact. 

The global market for sustainability-linked bond issuance has since grown to almost US$1 trillion per year, according to ratings agency S&P Global. 

Australia’s sustainable debt market is relatively small in global terms and Hughes said that one of the key objectives of the green bond was to support its development by adding scale and credibility.  

Proceeds from the bond will be used to help finance three types of environmental projects: 

1. Climate change mitigation. This includes energy infrastructure projects to help unlock more renewable power generation, support for green hydrogen hubs, and financing for electric passenger trains. 

2. Climate change adaptation. Investment in rural water use and efficiency programs, as well as international climate adaptation plans across the Indo-Pacific region. 

3. Improving environmental outcomes, including preserving the habitat of the koala and protecting the Great Barrier Reef.

For more detail, visit the AOFM website.

Strong demand

Hughes and her team received strong interest from investors during a month-long roadshow to sell the deal, which took in major financial centres in Europe and Asia, as well as Sydney, Melbourne and Brisbane, and virtual presentations to North American investors.  

The roadshow drew a broad range of views on Australia’s progress in tackling climate change, Hughes said. While some investors were comfortable with the country’s plans to shift away from its reliance coal-fired power, others said the energy transition was moving too slowly. 

The Labor government has said its policy initiatives can see renewable energy supply over 80 per cent of the nation’s electricity by 2030, which is more than double its current share of the energy mix. 

The government’s cost of borrowing under the green bond, which will mature in June 2034, was slightly cheaper than its conventional equivalent. Hughes puts this so-called “greenium” down to strong demand and the participation of dedicated “green” investors who are not simply motivated by the hunt for yield.  

There was also novelty value in it being the Australian government’s first.

“We’re expecting our green bonds to operate a lot more like our normal bonds over time. That’s certainly been the experience offshore - that the premium has got smaller and smaller as more bonds come on to the market,” Hughes said. 

A premium price “is not a key indicator of success for us,” she added. More important is that the framework that sits behind the bond is credible and robust, ensuring that investors continue to invest in Australian green bonds into the future.  

AOFM’s next priority is to “build out” the green bond, increasing the volume available on the market. Hughes expects that to happen over the next twelve months and, all being well, a new green bond is expected to follow in two or three years. 

Westpac was a joint lead manager on the bond, and Nell Hutton said the deal offers an important pathway for enabling investors to back public projects that drive Australia’s transition to net-zero.

 

James Thornhill

James Thornhill was appointed as editor of Westpac Wire in May 2022. Prior to joining the bank, he was a business and financial journalist with more than two decades of experience with international newswires. Most recently, he was a resources correspondent for Bloomberg, covering the mining and energy sectors, and previously reported on a broad range of topics from economics and politics to currency and bond markets. Originally from the UK, he’s had stints working in London, New York and Singapore, but is now happily settled in Sydney.

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